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Wilbur Ross Has Made Billions of Dollars, but on Trade He Doesn’t Make Sense

President-elect Trump’s choice for commerce secretary ticks all
of the traditional boxes. He’s a successful businessman. He has
ideas about how to promote U.S. commercial interests. And he shares
his boss’s views about international trade.

Of course, those are also good reasons to be wary of Wilbur
Ross. His misguided views on trade agreements and the trade
deficit, in conjunction with his affinity for protectionism and
backroom deal-making, will necessitate our vigilance to protect the
economy and free markets from the follies of crony capitalism.

Wilbur Ross has achieved great business success, mostly from
acquiring, restructuring, and selling companies. The Harvard MBA’s
talent for buying low and selling high is not in doubt. But since
it’s not credible to suggest that a billionaire businessman doesn’t
know what he’s talking about, understanding international trade and
its benefits must require an entirely different set of faculties,
which he lacks. How else to explain his positions?

Ross believes trade is a zero-sum game between Team USA and Team
China or Team Mexico. Exports are America’s points; imports are the
foreign team’s points. The trade account is the scoreboard, and the
deficit on that scoreboard means the United States is losing at
trade.

Ross’s preference for
bilateral agreements betrays an ignorance of the nature of
production and trade.

In a recent interview, Ross characterized the proposed
Trans-Pacific Partnership agreement as a “horrible deal” and
elaborated by saying: “There’s trade. There’s sensible trade. And
there’s dumb trade. We’ve been doing a lot of dumb trade. And
that’s the part that’s going to get fixed.”

Exactly what Ross means by that is unclear, but apparently he
believes trade is won or lost at the negotiating table — a
place where the U.S. team is habitually outmaneuvered, in his
opinion. It is bewildering to Ross that the United States would
cede its economic leverage by negotiating with more than one
country at a time, empowering the other parties to band together,
pool resources, and resist U.S. pressure.

But that’s an inaccurate reflection of the nature of trade
negotiations. Each government comes to the table with a set of
objectives, along with parameters guiding how far it can go to meet
those objectives. Alliances between and among parties form on an
issue-by-issue basis, and they tend to be fleeting. As the big dog
in almost every negotiation, the United States is usually the most
capable of employing these and other tactics to compel parties to
agree to its positions.

Ross’s preference for bilateral agreements also betrays an
ignorance of the nature of production and trade. Nearly all
economists, and nearly all of the economics literature, support the
view that the ideal is to have more people and more countries
— not fewer — connected in a free-trade area. The
economic bases for trade in the first place are specialization and
economies of scale. Larger markets afford us a more refined
division of labor to exploit our comparative advantages so that we
may produce more value among us. And they allow unit production
costs to decline as producers increase output and allocate their
costs over a wider base of customers.

If those concepts are foreign to Ross, he should at least be
able to appreciate that a series of smaller bilateral trade
agreements, as opposed to a single regional or multilateral
agreement, would place larger cost burdens on traders. If we had
eleven bilateral agreements with the TPP countries, each with its
own set of rules, the costs of record keeping, inventory
management, compliance, and trade diversion would be significantly
higher than they would be under a single regional agreement with
one set of rules.

Still, his preference for bilateral agreements notwithstanding,
Ross heaps praise on the Central America Free Trade Agreement. Ross
considers it to be America’s most successful agreement because the
United States registers annual trade surpluses with the CAFTA
countries. (Side note to Ross: The United States runs a trade
surplus with its 20 free-trade-agreement partners in aggregate.)
But, contrary to Ross’s views, trade surpluses are neither the
objective nor the result of trade policy. They have everything to
do with foreign demand for safe, dollar-denominated U.S. assets,
and in that sense, the U.S. trade deficit is a seal of relatively
good economic health.

In a letter to editor of the Wall Street Journal a few
months ago, Ross wrote: “It’s Econ 101 that GDP equals the sum of
domestic economic activity plus ‘net exports,’ i.e., exports minus
imports. Therefore, when we run massive and chronic trade deficits,
it weakens our economy.” Yikes! Ross isn’t the only person who
misinterprets the national income identity, but he may be the first
commerce secretary to make that misinterpretation his policy North
Star.

Of course, Ross was referring to: Y = C + I + G + X - M, the
national income identity, which accounts for the disposition of
GDP. It says that national output is either (C)onsumed by
households; consumed by businesses as (I)nvestment; consumed by
(G)overnment as public expenditures; or e(X)ported. Those are the
only four channels through which national output is disposed.

What do imports have to do with GDP? Why do we subtract M, which
signifies i(M)ports? We subtract M because imports are embedded in
the aggregate spending of households, businesses, and governments.
If we didn’t subtract M, then GDP would be overstated by the value
of spending on imports. But there is no inverse relationship
between imports and GDP, as Ross suggests. In fact, there is a
strong positive relationship between changes in the trade deficit
and changes in GDP.

The dollars that go abroad to purchase foreign goods and
services (imports) and foreign assets (outward investment) are
matched almost perfectly by dollars coming back to the United
States to purchase U.S. goods and services (exports) and U.S.
assets (inward investment). Any trade deficit (net outflow of
dollars) is matched by an investment surplus (net inflow of
dollars). That investment inflow undergirds U.S. investment,
production, and job creation. The United States balance of payments
has shown trade deficits for 41 straight years — a period
during which the size of the U.S. economy tripled in real terms,
real manufacturing value added quadrupled, and the number of jobs
in the economy almost doubled, outpacing growth in the civilian
workforce.

When asked in an interview about whether his prescriptions for
trade policy were protectionist, Ross replied that protectionism is
a “pejorative term.” Of course, protectionism has been integral to
Ross’s business success. In the early 2000s, Ross founded
International Steel Group for the purpose of purchasing several
legacy steel mills, including Bethlehem, Weirton, and LTV Steel. He
conditioned his acquisitions on both the imposition of steel
tariffs and the transfer of steel retirees’ legacy costs from the
companies’ books to the Pension Benefit Guarantee Corporation
(i.e., U.S. taxpayers). He sold ISG at a large profit to
Arcelor-Mittal within two years.

Likewise, Ross was a prominent advocate of textile quotas, which
were important to his turning a profit for International Textile
Group, essentially a replica of his steel-industry foray.

As commerce secretary, Ross will be charged with helping U.S.
businesses clear some of the hurdles they face abroad. But he will
also have administrative oversight — which comes with a lot
of discretion (read, potential for abuse) — of the U.S.
anti-dumping and countervailing duty laws, two of the most
prominent implements in the protectionist tool shed.

From the Ross Commerce Department, expect to see a lot of
managed trade arrangements “negotiated” under the threat of
punitive tariffs. Let’s be vigilant.